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Pfizer Strategist Bets on a Big Volatility Move

One speculator tied a large block of December 25-strike puts to a long stock position

by 10/2/2012 2:53 PM
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Puts are flying off the shelves on Pfizer Inc. (NYSE:PFE - 25.00) in today's session. Roughly 36,000 contracts have changed hands, representing nearly five times the average daily put volume. The majority of today's action occurred in one fell swoop at the December 25 strike, which saw a block of 20,000 contracts trade on the American Stock Exchange (AMEX) around 10:00 a.m. ET. These puts crossed for the ask price of $0.65, and there are only 703 contracts in open interest at this strike, making it safe to assume that new positions were initiated.

At first glance, we could assume that this speculator expects the Dow component to finish south of $24.35 at December expiration (the strike minus the premium paid). However, Trade-Alert indicated this block of puts was tied to a simultaneous purchase of 925,000 PFE shares, suggesting the investor has employed a delta-neutral strategy to bet on an increase in volatility over the near term.

From a broader view, today's heavy put volume is an anomaly for the drug stock. For starters, PFE's 50-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE)/NASDAQ OMX PHLX (PHLX) call/put volume ratio of 3.16 ranks in the 84th percentile of its annual range, suggesting calls have been bought to open over puts at an accelerated clip in recent months.

Plus, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.53 shows call open interest nearly doubles put open interest among options expiring within three months. Additionally, this ratio ranks lower than 97% of other such readings taken during the past 52 weeks, meaning short-term speculators are more call-heavy than usual toward PFE.

On a technical basis, the shares have added more than 44% on a year-over-year basis. Helping support this formidable price action has been PFE's 60-day moving average -- a trendline that has assisted the equity in its run higher over the last 12 months. What's more, the stock hit a five-year high of $25.41 in today's session.

PFE has pulled back modestly from this milestone, and was last seen 0.1% lower to hover near $25.

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